On November 14th, Frank Cohen, Senior Managing Director of Blackstone’s Real Estate Group, joined a a large group of Kellogg students for lunch and discussed Blackstone’s strategy, his career projection, the current state of the real estate markets, and provided general career and investing advice.

After graduating from Northwestern in 1995, Mr. Cohen spent two years with JMB Institutional Realty Corporation (Heitman post-merger) before joining Blackstone’s newly formed real estate group. At the time, Blackstone’s real estate group had raised its second fund worth $1.0B. Today, Blackstone’s real estate group is the largest real estate private equity firm in the world with $69B in assets under management.

Mr. Cohen explained that Blackstone’s well-established philosophy of focusing on buying the best real estate at the best price, often at a discount to replacement cost, has not changed since the group’s inception in the mid-1990s. What has evolved is the way in which the group sources investments. Blackstone’s first real estate funds of the mid-1990s focused on buying distressed debt from the Resolution Trust Corporation (“RTC”). Blackstone would then convert these discounted debt investments into equity, stabilize the properties, and sell the assets at a profit. By the time Mr. Cohen joined Blackstone, opportunities to buy distressed debt from the RTC were waning, and Blackstone needed to find other avenues for growth. Though more difficult, the group was still able to find opportunities where you could buy real estate at a discount to replacement cost in select markets, such as Northern California.

By the mid-2000’s, Blackstone began buying large public real estate companies. Why? “Because you could buy assets cheaper in the public markets than you could in the private markets. So in many cases, we could buy a company for a 5-10% discount in the public markets, and we could sell those assets for a profit in the private markets”, Cohen said. A great example of Blackstone’s success with this strategy emanated from its famed purchase of Equity Office in 2007 for $39B, the largest REIT LBO to date. After Blackstone purchased the company, Blackstone sold a significant portion of the Equity Office portfolio in the private market at a premium to the public market valuation. Blackstone has since expanded the Equity Office portfolio through strategic acquisitions during the downturn and the firm continues to harvest this successful transaction. Between 2002 and 2007, Blackstone bought 13 public companies, including Equity Office, Carr America, Extended Stay, Trizec and Hilton.

Mr. Cohen transitioned his discussion to the current investing environment, “It’s really easy to read the papers and get scared about the current investment environment. It’s much harder, because it’s a very competitive market, to have conviction and decide what it is that you really believe in and want to invest in”. Because Blackstone owns companies in almost every real estate asset class, the group has access to real-time data on the performance of most real estate markets and asset classes. For example, rather than having to wait for a quarterly brokerage report on the office market, Blackstone can access this information through their Equity Office asset managers on a daily basis. He pointed to the strengthening performance of many of Blackstone’s businesses and provided encouraging anecdotes such as 12-15 straight quarters of growth in the office sector. Contrary to some of the discourse about today’s investment environment, he explained that even modest growth (1-2%) combined with the limited supply deliveries in all sectors in the last five years “actually creates a good real estate investment environment”.

Mr. Cohen also provided some overall investment advice, not limited to real estate investments. He reiterated that he and his colleagues at Blackstone believe that it is important to keep things really simple, “You can run a ton of numbers on any deal and get convinced by an IRR. The last question I’m going to ask is the IRR…if you can’t explain the deal on a piece of paper and do the math on a calculator, then already you have a problem”. Mr. Cohen explained that this is not to say he believes that investing is easy. However, “the way in which you should measure and assess risk should be as simplified as possible”.

Mr. Cohen closed his remarks with some general career advice. He recalled the story of how an executive in his early days at Blackstone would find colleagues in their offices and ask, “shouldn’t you be on a plane?” His point was that most people do not originate their own ideas or investment strategies, and that engaging your network is crucial to generating ideas and deal flow and ultimately creating value for your business. Additionally, he recommended being a team player, and he compared Blackstone’s culture to “pick-up basketball”, where everyone is willing to check into the game and help the team win in any role. He suggested that students should be willing to pitch in on any task, regardless of title or perceived responsibility. Lastly, in addition to being effective at engaging your network and working in teams, Mr. Cohen observed that consistently throughout his career, “people who are truly detail oriented always seem to be successful”.